IDFC Securities - Gujarat Gas (GUJRATGAS) Gujarat Gas Q2FY18 results (Outperformer) - A weak quarter, prospects remain strong

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IDFC Securities

Gujarat Gas' Q2FY18 results (Outperformer) - A weak quarter, prospects remain strong

Q2FY18 result highlights

Gujarat Gas (GGL) adjusted PAT of Rs611mn, down 15% yoy, below estimates of Rs872mn, driven by weaker volumes of 5.7 mmscmd (IDFCe 5.9 mmscmd) and also lower gross margins of Rs6.7/scm (IDFCe Rs7/scm).
Despite the miss vs estimates, volumes increased 11% yoy driven by continued revival of demand from industrial/comm segment (+13% yoy) and steady growth in domestic/CNG demand (+5/7% yoy respectively).
Volume growth was lower than expected due to the combined impact of floods and GST related disruptions. Current rate of volumes back at ~6 mmscmd, with benefit of higher FO prices to play out over H2FY18.
Interest costs of Rs499mn declined 8% yoy, supporting earnings, while other income of Rs89mn also rose 27% yoy.

Key positives: yoy growth in volumes. Decline in interest/net debt.

Key negatives: Miss vs estimates driven by lower volumes/margins due to greater than anticipated impact of floods/GST.

Impact on financials: We tweak FY18/19E EPS by 2/3% to factor marginally lower volumes. We also introduce FY20E EPS of Rs47.9/sh with this note. TP revised up to Rs1105/sh (19x FY20E EPS + New areas DCF Rs195/sh).

Valuations & View

Despite the disappointment vs estimates we remain positive on long term prospects of Gujarat gas over FY18-20E. With volume traction visible and the development of newer areas (5 new districts Kutch, Botad and Silvassa Dahej and Thane commissioning in last 6-9mths) we see a strong volume growth trajectory over FY18-20E. With moderate spot LNG prices (rising as a % of overall gas sourcing), we believe margins should also regain strength over next 12-18 months. With the steadily building strength being seen in volumes and the higher margins, we see earnings visibility improving materially for GGL. Our estimates imply a CAGR of 10/5/11% in volumes/gross margins and EBITDA/scm over FY17-20E. Additionally, the newer area volumes are expected to add an estimated 3.4mmscmd of volumes to existing business by FY22E, taking total volumes to ~11.5 mmscmd. Current valuations of 16x FY19E EPS and 8.5x EV/E (adjusting for the NPV of new areas) remain attractive, with our revised TP implying ~15% upside from here. Reiterate outperformer.

11/12/2017 7 EN

Underlying

Gujarat Gas

Gujarat Gas Ltd Formerly known as Gujarat Gas Company Limited. Gujarat Gas Company Limited is an India-based company. The Company is engaged in Natural Gas Business in Gujarat. Natural gas business involves distribution of gas from sources of supply to centers of demand and to the end customers. The Company has underground pipe lines consists of mild steel (ME) and polyethylene (PE). These lines gas is supplied to Residential, Industrial, Commercial and Compressed Natural Gas (CNG). The Company also supplies piped natural gas to customers and retails compressed natural gas. Gas is used by customers for applications, such as heating, cooling, power and process. The Company has two subsidiaries namely Gujarat Gas Financial Services Limited and Gujaratgas Trading Company Limited.

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INE844O01022 India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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